Tax season is upon us and there have been some significant changes since last year. The following recap includes information that may prove helpful before starting your 2013 tax return. We’ve also included information for 2014 so you can start this year’s planning early.
What You Should Know for Your 2013 Tax Return
Here are some of the biggest changes from the IRS that will affect your 2013 taxes:
- Increase in the Highest Tax Bracket
- Who it affects: Taxpayers making more than $400,000 (single) or $450,000 (married/joint).
- What changes: The IRS raises your tax bracket from 35% to 39.6% and raises your capital gains tax rate to 20% from 15%. Though this is a big hit for high income earners, 98% of Americans should not be affected.
- Medicare Tax Related To the Affordable Care Act
- Who it affects: Taxpayers with income above $200,000 (single), $250,000 (married/joint) or $125,000 (married/separate).
- What changes: The IRS imposes a 3.8% net investment income tax and a 0.9% additional Medicare tax. If you live in an area with a high cost of living, such as the Bay Area or New York, this is likely to affect you. Try to realize your capital gains during a year in which your income is under these limits.
- Unreimbursed Medical Expenses
- Who it affects: Taxpayers under the age of 65 who paid for medical expenses out of pocket in 2013.
- What changes: Your medical expenses must now exceed 10% (previously 7.5%) of your adjusted gross income. Since medical expenses are deductible in the year you pay them (not when incurred), try to pay all of your expenses in one year to qualify for the deduction.
- Same Sex Marriages
- Who it affects: Same sex couples who were married in a state that recognizes same sex marriages.
- What changes: You can now use the filing status of “married filing jointly.” In many cases this will be a positive change. In the case where you think your taxes may be higher, make sure you consult with a CPA to take advantage of all possible tax minimization strategies.
- Home Office Deduction
- Who it affects: Taxpayers who work from home.
- What changes: There is a new optional method to determine your home office deduction that will no longer require tracking actual expenses. The maximum deduction is $1,500 based on 300 square feet. However, keep in mind that tracking your expenses is still likely to result in a higher deduction.
- Alternative Minimum Tax (AMT)
- Who it affects: Taxpayers who have been paying AMT instead of the regular tax.
- What changes: Good news! The AMT threshold has been increased and permanently indexed for inflation. This will help the majority of middle class Americans hit with AMT in recent years.
A recap of recent tax changes can help you prepare for your 2013 and 2014 returns.
Looking Ahead to 2014
It’s never too early to start planning for the future. Here’s what you can look forward to next year when doing your taxes for 2014:
- Health insurance mandate. Starting in 2014, everyone must carry a minimum level of health insurance. If you don’t, you will pay a fine of up to 1% of your annual income or $95, whichever is higher. Make sure to get your coverage in place before March 31. Eligible taxpayers can receive a premium assistance credit.
- Health savings accounts. If you have an HSA and high deductible plan, your contribution limits increase to $3,300 (individual) or $6,550 (family) for 2014.
- Retirement plan contributions. Retirement plan contribution limits for 2014 are as follows:
- SEP IRA/Solo 401(k): $52,000.
- 401(k) and 403(b) employee contributions: $17,500 and $5,500 catch-up for people over 50.
- IRAs: $5,500 and $1,000 catch-up for people over 50.
Doing taxes is not most people’s idea of fun. Just be motivated by the thought that once you do them, they are done—until next year. Happy tax season!